Could the UK see a Chipotle-style public market boost?
08/11/2013
McDonald’s is indisputably the world’s leading restaurant company by sales, a global phenomenon. What is perhaps less well understood is its claim to be the best spotter of emerging restaurant brands. In the UK, McDonald’s took a 33% stake in Pret A Manger back in 2001, disposing of the 33% holding in 2008, when Pret was sold to the private equity firm Bridgepoint for £345m. It was never revealed how much McDonald’s paid for its 33% stake, but suffice to say it booked a healthy profit for its seven-year investment.
Far and away more impressive as a pick of brand star potential was McDonald’s investment in Chipotle Mexican Grill. The Chipotle brand is widely regarded as the most important game-changer on the American restaurant scene in the past two decades. But McDonald’s got involved at a very early stage, in 1998, when the company operated just 14 locations in the Denver, Colorado area. The length of McDonald’s involvement at Chipotle was not dissimilar to its Pret A Manger investment. By 2005, McDonald’s had helped Chipotle grow to 460 sites and had invested around $360m. The time had come to spin Chipotle off. An Initial Public Offering in January 2006 saw McDonald’s bank around $1.5bn for its 90% stake in the company, the kind of return that would put a smile on the face of the most ambitious of private equity bosses.
By any measure, McDonald’s had ridden its Chipotle winner fairly hard – and earned a wonderful return for its shareholders. The subsequent history of Chipotle in the public markets had led some commentators to suggest McDonald’s left the stage far too early. Chipotle shares have soared by more than 1,300% since its IPO and have climbed by 44% this year. Its shares change hands at giddy 44 times its price-to-earnings ratio, twice that of the still-hugely-respectable 22 times that McDonald’s commands. Chipotle’s remarkable returns have positioned it as a hyper-growth stock, putting it in the same category as certain tech stocks, with the result that investors and lenders now have a considerable appetite for the broader sector, looking for the next game-changing fast-casual offer that will rip away chunks of the enormous eating and drinking-out market. Chiptole’s share price success is based on its impressive fundamentals. “It turns out that Chipotle is probably the best restaurant brand created in 20 or 15 years, with the best growth and profit metrics in the industry,” says one analyst. Each new Chipotle unit produces annual sales of $2.1m, which throws off Ebitda of circa $574,000, while average opening costs are $800,000. The return on investment for each site comes to around 72% – in the normal course of events, operators tend to be delighted by a ROI north of 30%.
So far, Chipotle is largely a US success story and is broadly unproven abroad. It currently operates around 1,500 site in 44 states but only has units in three other countries. Its six London sites still seem to be finding their way, and the UK operation has required a couple of cash injections from its US parent. Nevertheless, the success of Chipotle has paved the way for other successful IPOs in the US. The sandwich chain Potbelly Sandwich Works, with its 300 US locations, has seen its shares double in value in its early days as investors bet on the company’s chance of seizing a much larger share of the sandwich market, big enough to match the privately owned Subway, which has grown to 38,000 units around the globe.
Back in the UK, perhaps we will not have too long to wait before an explosive sector growth story creates the same kind of investor enthusiasm when it is launched on the public markets. There is talk of Patisserie Valerie taking the IPO route next year. Earlier this week, owner Luke Johnson told me that the brand had achieved its targeted £12m of operating profit this year. And yesterday, at our Propel Multi Club Conference, Johnson reported that he thought the brand had potential to expand to almost 300 more sites, presumably even without the possibilities thrown up by its nascent concession trial in Next outlets. Yesterday, also at our conference, Peter Hansen, founder of Sapient Corporate Finance, predicted a rash of restaurant sector IPOs in the coming few years. “The best restaurant groups will list on the equity markets,” he forecast. Interesting times ahead.